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Why choosing between the active & passive investment strategies

Choosing between an active or passive investment strategies is an important debate within the investor community.

In terms of active funds management is to take full advantage of short-term price fluctuations and expect a big return. It requires really much deeper analysis, the skill and the ability to understand when to select a specific bond, stock or any instrument, but it gives you more flexibility. An active investment requires confidence that anyone investing the portfolio will know exactly the appropriate time to buy or sell. An active fund is great when the analyst is right and brings high returns but terrible when they are wrong the risk is high and unknown. Another thing the fees & cost of investing in active funds are more expensive than passive funds and can kill returns.

Different analysis tends to show the passive investments can offer to the investors lower fees than active fund management. It shows greater transparency and the risk is greatly diminished, for example a long-term investor won't have to wake up at the opening bell every day and his stress level will remain at a minimum. Another aspect of the long-term investing is important, is that anyone can do it and a majority of investors will get a better return just in investing in passive funds.

Passive Management

Key Feature

Active Management

Generally lower than active management

Investment Management Fees

Generally higher than passive management

Generally tax efficient

Tax Efeciency

Depends on the investment manager

No

Potential for Above-Market Returns

Yes

Yes, after incorporating fees

Potential for Below-Market Returns

Yes

No

Potential for Down-Market Protection

Yes

Seeks to replicate the performance of the benchmark

Decision-Making Process

Seeks to capitalize on market conditions

Active Management

Passive Management

For illustrative only, and is not representative of all active or passive managers

Source: "The Relentless Rules of Humble Arithmetic" by John Bogle

Active Is on the Ropes Assets in active strategies are plummeting, while

To really understand the topic it’s fundamental to adopt another subject which literally changes the behaviors of traders, is the influence of the 2008 crisis on the popularity of passive investment.

As a result of the financial 2008 crisis, there is a renewed interest in an essential dimension of financial activities and we can see it! The investors have started to trust and invest significantly more in the passive & long-term investments. The popularity of ETFs and the emergence of Robo-Advisors are totally involved in this renewal.

This subject tend to show that after the crisis the quantity of retail investors and passive investments have risen significantly this taking into account the lack of knowledge and experience of some retail clients. Therefore Robo-advisors have a comparative advantage over traditional financial advice, which must generate sufficient outperformance to justify its cost. Thus, even if its use seems to be primarily motivated by technical reasons, the passive funds management adopted by the robo-advisors constitutes an innovation in the model of passive investments funds.

The ETFs take a passive investment approach. Therefore the expenses are considerably less to run. ETFs are diversified and decrease the risk of single-security price changes. Thankfully to their low cost and their efficiency combined with the Robo-advisors, they are really the keys and the will of such investment instruments.

FORECAST Global Assets Under Management by Robo-Advisors

Smart Beta Boom

U.S. ETF assets hit record $639 billion

This topic finally and undoubtedly shows us the major’s reasons for the growing and rapid popularity of passive and long-term investment strategies.